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ART CHARITY TRAINING SEMINAR Introduction Phillip Callow – Specialist Charities Partner - Mazars 9 May 2005 Charities - Potential Issues Role of the Trustee / Corporate Governance Trustee conflicts of interest Effective trustee meetings Risk management Money laundering Soft vs. Hard

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art charity training seminar



Phillip Callow – Specialist Charities Partner - Mazars

9 May 2005


Charities - PotentialIssues

Role of the Trustee /

Corporate Governance

Trustee conflicts

of interest


trustee meetings

Risk management



Soft vs. Hard

return to


Changes in



Issues potentially

facing charities



Reserves policy


recoverable VAT




of property


with business

Charitable reliefs

© Mazars 2003

  • Introduction & welcome
  • Key principles - accounting
  • Corporate Governance – so you want to be a charity?
  • Break
  • Draft Charities Bill Update
  • Accounting for Public Funds: The New Issue
  • SORP 2005 update
  • Questions
  • Additional slides - auditing service level agreements
  • Additional slides – risk management and assessment
key principles
Key Principles

We are looking at:

  • Why are charity accounts different:
    • Fund Accounting
    • Income Recognition
    • Cut off
    • Expenditure
    • Balance Sheet
key principles6
Key Principles

How do Charities differ from Businesses?

Business - exists to make a profit for shareholders

Business - operated by spending money to make (more) money

Businesses accountable to shareholders, regulators….

Charity - exists to fulfil charitable purposes (not for profit)

Charity - receives money in order to spend it on charitable purposes

Charities accountable to donors, regulators…..

fund accounting
Fund Accounting

Different types of fund:

Unrestricted: Undesignated / Designated

Restricted: Income / Capital

Capital - Permanent Endowment

Expendable Endowment

Designation - by trustees (for future plans, capital items)

Restriction - by donors / terms of appeal. Can only be used for that purpose.

Each restricted fund is a trust - and needs to be accounted for separately.

(So charity accounts can be so complicated…)

fund accounting8
Fund Accounting

Restricted Funds:

Is a restriction permanent?

Restricted fund / contract income

Interest earned on restricted funds

(Interest earned on endowments)

income recognition 1
Income Recognition (1)

Income Recognition

A resource is available when all of the following conditions are met:




Test any transaction against this criteria

income recognition 2
Income Recognition (2)

Entitlement – is there any condition to be met before trustees can use a receipt ?

  • e.g. match funding, delivery of a service, time period to elapse?
  • case defer until entitlement clear
  • Certainty - is there any question over the likelihood of receipt?
  • bad debt, unclear promise?
  • Measurement - can a value be placed on the item?
  • Does an asset need to be sold first?
  • Note - would all these apply to a commercial transaction?
cut off issues
Cut off Issues

In what period does a resource become available to the trustees?

- Tests of entitlement, certainty, measurement

- Is there a condition that needs to be met first?

- Does a contract have to be fulfilled?

- What about donations for capital items?

- Does it matter if it has been spent?


The Wells for Africa Foundation:

What are the issues in accounting for the following items?

- £20,000 to dig wells in Sudan

- £20,000 to dig 10 wells in Sudan

- £20,000 to dig wells in Africa

- £20,000 to fund a well development officer in 2005/06 in Africa

- £100,000 to buy a JCB to dig wells in Africa (expected useful life 5 years)

What happens if it only costs £15,000 to dig 10 wells in Sudan?

(5 Marks)

expended resources
Expended Resources


- Cost allocations (shared costs)

- Descriptions of resources expended

- Timing of liability recognition (grants)

- But see SORP 2005….

the balance sheet
The Balance Sheet

Gives a snapshot of how year end resources are held by type of assets

AND analysis of assets held by fund (usually in notes)

Some unique valuation issues:

- Inalienable assets

- Distinction between assets held for Primary Purpose and Investment

corporate governance
Corporate Governance
  • Trustee responsibilities
  • Corporate Governance

Controls and budgets



Competent staff

Use of assets




Trustee responsibilities


Conflicts of





Duty of care




Best interests

© Mazars 2003


Job description

Word of mouth

Other charities




Trustee finding





Skills audit

Trustee recruitment and induction



Hand over


Financial training



Secure the property

Conflicts of interest


What is Corporate Governance?

Charities and Governance

Recent governance developments

Next steps and conclusions

what is corporate governance

Legal and regulatory bodies

Ethical behaviour

The systems and structures by which organisations are directed and controlled

Honesty and transparency

Members andstakeholders


Public opinion


What is Corporate Governance?
the triple bottom line reporting and corporate social responsibility csr
The Triple Bottom Line Reporting andCorporate Social Responsibility (CSR)
  • Economic and financial stability.
  • Social responsibility
  • Environmental responsibility with ethical investments and products/services

Emphasis on stakeholder relationships and managing these relationships


What is Corporate Governance?

Charities and Governance

Recent governance developments

Next steps and conclusions

continuous history of scandals
Continuous history of scandals…
  • Accountability of receipts
  • Trustees and workers
  • Connected parties
  • Other irregularities

All signs of poor overall governance !

characteristics of trustees and trustee boards
Characteristics of Trustees and Trustee Boards
  • Composed of non-executive directors (trustees), headed by a non-executive chair
  • Chief executive usually not a member of the trustee board although may attend as a non-voting member; trustees do not attend senior management meetings
  • Trustees are generally not paid
  • Trustees are not formally recruited but personally invited to serve
  • Little performance evaluation or ongoing training and development
  • Skills deficits on many boards
  • ‘Inspection’ committees missing e.g. Audit Committee
  • Insufficient focus on stakeholder risks
charity commission guidance on many topics
Charity Commission - Guidance on many topics
  • The Hallmarks of a Well-run Charity
  • Responsibilities of Charity Trustees
  • Payments to Trustees
  • Accounting and Reporting Requirements
  • Internal Financial Controls
  • Charities and Fund-raising
  • Charities and Trading
  • !
sorp 2005 governance disclosures in the trustees annual report
SORP 2005 – Governance disclosures in the Trustees Annual Report
  • Names of all trustees, method of appointment or election of trustees
  • Name of any others entitled to appoint the trustees
  • Explanation of the objects of the charity
  • Description of the organisational structure and how decisions are made
  • Statement on relationships with related parties
  • Review of the activities of the charity
  • Statement on risk management
  • Statement of the charity’s policy on reserves and investments
risk management
The Charities SORP states that charities must include in their Trustees annual report:

“a statement confirming that the major risks to which the charity is exposed, as identified by the trustees, have been reviewed and that systems have been established to mitigate those risks”.

Paragraph 31 (g)

Risk management

What is Corporate Governance?

Charities and Governance

Recent governance developments

Next steps and conclusions

revised combined code

‘Higgs’ key features

‘Smith’ key features

  • Board balance and independence
  • Appointments to the board
  • Information and professional development
  • Performance evaluation
  • Role of non-executive
    • Strategy
    • Performance
    • Risk
    • People
  • Role of Audit Committee
  • Financial reporting
  • Internal controls and risk management systems
  • Whistle blowing
  • The internal audit process
  • The external audit process
  • Also:
  • Composition, resources & reporting
Revised Combined Code

The Code applies to listed companies for reporting years beginning on or after 01.11.2003. Its principles and provisions are a major source of best practice for organisations including charities.

corporate governance focus
Corporate Governance Focus
  • Don’t lose sight of the spirit of governance - a simple ‘tick box’ approach to governance is not enough – it’s the ‘spirit’ which counts.
  • As Derek Higgs stated in his review:Corporate governance provides an architecture of accountability – the structures and processes to ensure companies are managed in the interests of their owners. But architecture in itself does not deliver good outcomes.
  • Sound corporate governance is associated with the quality of executive and non-executive directors – that is people.
  • Don’t forget stakeholders. Growth in corporate social responsibility reporting – this is ‘voluntary’ governance.
corporate governance focus31
Corporate Governance Focus
  • Rethinking Governance: The results of the ACEVO governance inquiry (December 2003)
  • Private Action, Public Benefit: A Review of Charities and the Wider Not-For-Profit Sector (September 2002)

What is Corporate Governance?

Charities and Governance

Recent governance developments

Next steps and conclusions

improving governance
Improving Governance
  • Wider and more open recruitment of trustees
  • Consider paying for trustees who bring specialist skills to the board
  • Increase emphasis on training, development and performance appraisal
  • Consider different governance structures e.g. two tier board
  • Clarify what is expected of trustees e.g. service contracts
  • Develop inspection systems from audit committee to internal audit
  • Build on existing governance guidelines
  • Incremental or radical change?
  • Draw on Combined Code especially Higgs themes
  • Sharpen the teeth of the Charity Commission …. FSA approach?
  • Match nature, size and complexity
  • Consider Public Interest and Stakeholders







Business partners


…The Court of Public Opinion

The Media





stakeholders specific to the charity sector
Stakeholders specific to the Charity sector
  • Trustees
  • Volunteers
  • Pressure Groups
  • Consumers/Clients/
  • Funders
  • Benficiaries

What is Corporate Governance?

Charities and Governance

Recent governance developments

Next steps and conclusions

the charities bill
The Charities Bill

The story so far:

  • Strategy Unit Review 2002 (reforming the legal framework, building trust and confidence, ensuring independent, open and proportionate regulation)
  • Consultation – 2002
  • Government’s Response – 2003
  • First Draft Bill 2004(also SORP 2005, SIR, Guidance)
  • Parliamentary Scrutiny – 2004
  • Bill introduced to House of Lords December 2004
charities bill outcome of scrutiny 1
Charities Bill – Outcome of Scrutiny -1
  • “Joint Committee” report published 30 September 2004
  • Main conclusions:

- Welcomes long overdue legal reforms

- Keen to ensure smaller charities are not “over-burdened”

- Like to see charities given greater freedom to trade

- “desire to see charities – and charitable endeavour and income – grow, not diminish in our country”

charities bill outcome of scrutiny 2
Charities Bill – Outcome of Scrutiny - 2
  • 52 recommendations – include:

- Clarify definition of religion

- Commission to use its powers “fairly, proportionately and reasonably”

- Fundraising and public collections – CC grant “certificates of fitness”

  • Trading within charities
  • Public Benefit
charities bill outcome of scrutiny 3
Charities Bill – Outcome of Scrutiny - 3
  • Trading (non primary purpose)
    • Advantages to allow charities to trade
    • But - should be an upper limit (higher than now)
    • Consultation needed on appropriate level
charities bill outcome of scrutiny 4
Charities Bill – Outcome of Scrutiny - 4
  • Public Benefit
    • Significant debate!
    • Principles set out in Home Office/Charity Commission joint concordat
    • Non-exclusive criteria, non binding guidance
home office charity commission concordat
Home Office / Charity Commission Concordat
  • Current Law on public benefit retained (except presumption of public benefit removed for charities for the relief of poverty, advancement of religion and education)
  • Case by case determination
  • Fee charging:
    • Direct and indirect benefits to public or significant section of it taken into account
    • Fee charging does not necessarily preclude public benefit
    • An organisation that wholly excludespoor would not be for public benefit
charity commission proposed application
Charity Commission – Proposed application
  • Guidance posted: “Public benefit checks – how will we carry them out?”

- Review applications from new charities

- Research and report on fee charging charities

- Check all existing charities

- Provide guidance on any changes needed/right of appeal

  • Updated guidance RR8 “ The Public Character of Charities” – draft for comment to be published
the charities bill in conclusion
The Charities Bill – in conclusion
  • Next steps:

- Queen’s Speech – 23 November - announced

- Draft bill introduced to House of Lords 20 December 2004

- Bill still to be debated, passed and Assent given

- Delayed by the General Election!


We are looking at:

A client we will call BME

Which works for the social regeneration and social integration of black and minority ethnic communities

Strategic programmes in the fields of:

- community development

- health

- employment

- other matters

Policy and research into black and minority ethnic issues

income sources
Income sources

Donations,grants and contracts from private and public sector organisations including :

- Home Office

- Office of the Deputy Prime Minister

- local authorities

- health authorities

- Association of London Government

- London Development Agency

- Millennium Commission

- Comic Relief

- Kings Fund

- Baring Foundation

reasons for the investigation
Reasons for the investigation


- interest of funders

- concern over accountability for and use of funds

Causes for concern included:

- late filing of annual financial statements

- lack of clear and timely responses to funders enquiries over use of and accounting for monies

- poor substantiation of costs claimed

- treatment of core costs

- concern over possible double funding and misuse of grant monies

risks in similar situations
Risks in similar situations

For clients:

- reputation of trustees/directors and the organisation with:

- funders

- regulators

- the public

- breach of grant conditions

- non-compliant financial statements

- future funding

- going concern

risks in similar situations52
Risks in similar situations

For Mazars:

- expectations of funders, regulators and public

- reputation

- inappropriate advice

- wrong audit and grant reports

key features 1
Key features (1)

NAO thinking: the right to ‘follow the money’ (public money)

NAO approach:

- ‘parties reasonable expectations’ of obligations arising from arrangements

- having regard to:

- Charity Commission guidance on internal controls and Hallmarks of an Effective Charity

- SORP 2000 and in due course 2005

- substance over form

key features 2
Key features (2)

Charity Commission attitude:

- to disclosure compliance in:

- the Trustees’ Report and (not as an alternative)

- the financial statements

- comprehensive and specific disclosures

- no judgement allowance for the ‘immaterial’

- material by nature

implications for clients 1
Implications for clients (1)

Management accounting systems (budget and actual) must be able to:

- distinguish income and eligible costs relating to individual grants and contracts

- demonstrate on a verifiable basis core costs in accordance with terms of grants and contracts

- identify surpluses and deficits and the treatment thereof

- report to funders the key restrictions or otherwise

- demonstrate veracity of free reserves

implications for clients 2
Implications for clients (2)

Inability to do so calls into question whether:

- proper books and records have been kept appropriately

- true and fair view SORP-compliant financial statements can be prepared

implications for auditors 1
Implications for auditors (1)

Attention to fundamentals of book-keeping and management accounting systems and their application

Significance of grant funding and audit opinions and relationship to the organisation as a whole

Validation of free reserves

Attention to compliance

Comprehensive high level and detailed management reports covering all external reporting not just financial statements

implications for auditors 2
Implications for auditors (2)

The NAO premise is based largely on ‘substance over form’ and is not yet encapsulated in the public domain

But this is their thinking and mindset

You need to address where your understanding of this issue falls short of reality

And make sure you keep up to speed on the matter

Mazars has raised this issue with the Charity Commission in our response to the draft SORP 2005

And with the Charity Law Association as this is within their remit

and finally
And finally

The ACEVO full cost recovery template sets out a model clients could use to allocate costs in full against income

In due course ACEVO may have an interest in the matter because the sharing of risk between funder and funded is onerous

Please share any evidence you come across

why sorp 2005
Why SORP 2005?

Recent developments:

- “Statement of Principles” for public benefit entities

- Accounting Standards Changes (e.g. Pensions FRS17)

- The Strategy Unit recommendations:

- improved methods for apportioning costs

- more meaningful financial comparisons

- strengthen focus on achievements

- Ongoing review process

sorp 2005 exposure draft timetable
SORP 2005 Exposure Draft - Timetable
  • Accounting and Reporting by Charities – Statement of Recommended Practice
  • Draft published in July 2004
  • Under consultation to 30 September 2004
  • Final version March 2005
  • Effective for accounting periods beginning on or after 1 April 2005
  • Earlier adoption encouraged
sorp 2005 main changes
SORP 2005 – Main Changes

Trustees’ Report:

- Focus on Achievements against Objectives

- Layout more structured

- Some more information

Financial Statements

- Focus on Activities

- Clearer linking of income with expenditure

- Definitions expanded and clarified

trustees report
Trustees’ Report
  • New layout in two main sections:
    • Reference and Administration
    • Narrative:
      • Structure, Governance and Management
      • Objects and Activities
      • Achievement and Performance
      • Financial Review
      • Plans for Future Periods
trustees report65
Trustees’ Report
  • Reference and Administration:
    • Names and addresses of charity, advisors etc as before
    • Names of Trustees in period as before
    • NEW: Names of CEO, senior staff
trustees report narrative
Trustees’ Report – Narrative
  • Structure, governance and management
    • Nature of governing document, trustee appointment, organisational structure, risk management statement, as before

NEW: induction and training of trustees

  • Objectives and Activities
    • Summary of legal objects, details of significant activities, contribution of volunteers, as before

NEW: Explanation of aims, main objectives for the year, strategies for achieving objectives.

trustees report narrative67
Trustees’ Report - Narrative
  • Achievements and Performance
    • Review of activities, investment performance, as before

NEW: performance against objectives set, fundraising performance

  • Financial Review
    • Reserves policy, comments on deficits, investment policies

NEW: Review of principal funding sources

NEW: Ethical stance of investment policy

trustees report narrative68
Trustees’ Report – Narrative
  • Plans for the future

NEW: Setting out plans and key objectives for the future

NEW: Objectives framework for next trustees annual report…

financial statements focus on activities
Financial Statements – Focus on Activities
  • Classifications of Incoming Resources:
    • Income from generated funds:
      • Voluntary income
      • Activities for generating funds
      • Investment income
    • Income from charitable activities
    • Other incoming resources
financial statements focus on activities70
Financial Statements – Focus on Activities
  • Classifications of Expenditure:
    • Natural description – rent and rates, wages etc
    • Functional Classification – Charitable, Grants, Support costs, Admin costs
    • NOW: Activity based
      • Cost of generating funds (generating donations, costs of goods sold, investment management
      • Charitable Activities – by main areas of work (includes grants)
      • Governance Costs
sofa linkages
SOFA - Linkages
  • Aim is to be able to link incoming resources and resources expended within the SOFA, where applicable:
    • Link “Voluntary income” to “Cost of generating voluntary income”
    • Link “Activities for generating funds” to “Fundraising trading”
    • Link “Investment income” to “Investment management costs”
    • Link “Incoming resources from charitable activities” to “Charitable activities”
  • Thus, for example charity shop sales will match to shop costs, trading enterprise income to match to cost of running trading subsidiary, “service level agreements” to cost of providing services etc.
definitions expanded and clarified
Definitions Expanded and Clarified
  • Recognition of income (Entitlement, Certainty and Measurement)
    • When does entitlement occur? More guidance:
      • Contract – defer until performed
      • Grant with performance conditions – defer until performed
      • Grant with conditions within charity control – on receipt
      • Grant with conditions outside control, or time specific – defer until conditions met
      • But don’t defer a donation just because it has not yet been spent!
definitions expanded and clarified73
Definitions Expanded and Clarified
  • Recognition of expense / liability
      • Contract – as resources expended on performance
      • Grant with performance conditions – as with contract
      • Grants made with conditions outside granting charity control – on commitment
      • Grants made with conditions within charity control (e.g. review) – when conditions met
other amendments
Other Amendments
  • Support costs - in notes if applicable (not an activity)
  • Admin Costs - replaced by the cost of the activity of Governance
    • e.g. running of the charity in terms of public accountability and at a strategic level, such as audit, legal advice to trustees, trustees meeting costs, preparing statutory accounts.
  • Joint publicity (fundraising) and educational costs
    • assume fundraising unless education aimed at beneficiaries.
  • Heritage Assets
  • FRS 17
in conclusion
In Conclusion….
  • Final version – on CC website – or hard copy
  • Early Adoption possible and encouraged
  • Any Questions?
question answers

Question & answers?

Phillip Callow/Ian Rodd/David Haines

charity training seminar


Grants and service level agreements


We we are looking at:

Any form of audit opinion requested of the auditor in relation to public funds granted or forthcoming in relation to the provision of services as required as a condition of funding.

sorp 2005 definitions
SORP 2005 definitions

What is a grant?

A grant (Glossary GL20) is a voluntary payment.

It may be for the general purposes of the recipient charity or for some specific purpose such as the supply of a particular service.

It may be unconditional or be subject to conditions which if not met by the recipient may lead to part or all of the grant being repayable.

sorp 2005 definitions80
SORP 2005 definitions

What is a performance-related grant?

A performance-related grant (Glossary GL35) is one with the characteristics of a contract:

  • the terms of the grant require the performance of a specified service which further the objectives of the grant maker and:
  • where payment of the grant is conditional on a specified output being delivered by the grant recipient i.e. a service level agreement is in place.
sorp 2005 accounting
SORP 2005 accounting

Accounting for a performance-related grant, paragraph 80

Entitlement to the incoming resources arising on a performance-related grant should be recognised to the extent that the recipient charity has provided the goods or services.

examples of funding sources
Examples of funding sources

Accounting for a performance-related grant, paragraph 80

European structured funds

  • ERDF re Office of Deputy Prime Minister, Dept. of Transport, Local Govt. and Regions and DTI
  • ESF via Dept. of Work and Pensions and Dept. for Education and Skills

Services out-sourced from publicly-funded organisations such as:

- HMG departments

- Government Offices e.g. Government Office for London

- Local authorities

- Health Authorities

- Social Services

- Non-departmental public bodies and many more

dangers to watch preparation of financial statements
Dangers to watch – preparation of financial statements

Obtain and read terms of the grant (especially those that resemble a contract)

Understand the terms and the criteria concerned for:

  • income recognition policy. What determines when income is earned as opposed to cash received?
  • which costs are covered?
  • how are core costs to be treated?
  • what happens to any surplus or deficit?
  • disclosure in accordance with SORP 2005
  • accountability to funders and / or other contract parties
and finally84
And finally

This is something we need to take seriously.

There is an expectation gap between you and your funders concerning accountability as to how funding has been spent, what has been achieved and how this is reported.

We need to be mindful of this when accounting for grant income and considering the likely impact on your accounts.

what is risk
What is risk?

The uncertainty surrounding events and their outcomes which may have a significant impact on

  • operational performance
  • achieving aims and objectives
  • meeting the expectations of stakeholders
in other words
In other words…….
  • Not just aiming to prevent disaster
  • But taking a positive attitude to mitigate risks to achieve goals
  • Accepting that there are risks in doing anything
  • And risks in doing nothing
an approach
An approach
  • Identify the risks you face
  • Prioritise them
  • Identify and evaluate the controls
  • Decide how to manage the risks
  • Report the outcomes
a framework for charities
A framework for charities
  • Identify the risks you face
    • Governance?
    • Operational?
    • Financial?
    • External and reputational?
    • Regulatory?
    • Litigious?
  • ………….be imaginative!


Tax planning


Reserves policy




Strategy and goals

Risk assessment





Corporate Governance

Internal/external checks


Risk management




Internal audit (is our risk management effective?)


Pass on

high level risks governance
High-level risks - Governance
  • Failure to meet charitable objects
  • Or acting outside them
  • Poor planning and direction
  • Lack of skill or commitment
  • Weak induction programme for new trustees
  • Inappropriate organisational structure
  • Overly dominant individuals
  • “Bees in bonnets”
  • Conflicts of interests
  • Poor performance of the trustees as a body
high level risks operational
High-level risks - Operational
  • Failure to comply with contracts
  • Poor performance under contracts
  • Inappropriate investment policies
  • Unprofitable operations
  • Unsuccessful fundraising
  • Employment disputes
  • IT failure
  • Inappropriate branch structure
  • Lack of professional advice
high level risks financial
High-level risks - Financial
  • Missing budget
  • Inadequate reserves
  • Cashflow problems
  • Inability to borrow
  • Under-funded pension schemes
  • Fraud
  • Lack of fund accounting
  • Funds in deficit
  • Inappropriately structured transactions
  • Unexpected tax liabilities
  • Lost legacies
contact information
Contact information
  • Phillip Callow BSc (Hons) FCA
  • Partner
  • 023 8023 2428
  • Ian Rodd BSc ACCA
  • Manager
  • 01202 680777